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Property tax enforcement: Isn't there a better way?



The west-side slumlord doesn't want to pay property taxes on his shabby old tenement. So after five years, he owes Cook County about $150,000 in back taxes. County officials post the building at a scavenger sale for tax-delinquent properties, just as the law requires.

That's fine with the slumlord; he has his partner buy the building at the auction, which means the county extinguishes all past tax debts, and the slumlord goes back to sucking rents from his tenants and spending nothing on the building, which falls into worse and worse repair.

Sound confusing and counterproductive? It should. The laws governing property-tax collection are so riddled with problems and loopholes that it's virtually impossible to collect taxes on property in poor neighborhoods.

That's the conclusion of a report recently released by the Campaign for Responsible Ownership, an ad hoc coalition of developers, lawyers, and business leaders. Task-force members estimate that there are at least 45,000 pieces of property in Cook County whose owners are five years behind on their taxes. This means a cumulative loss to the county of $200 million.

"The system is filled with loopholes that enable owners to avoid paying their property tax," says Scott Lancelot, a member of the task force and director of redevelopment for the nonprofit Neighborhood Housing Services. "We're talking about property in low-income neighborhoods that have been ignored. No one's really watching what goes on there."

All tax-delinquent properties are put up for auction after one year. The most desirable properties are sold immediately and at a relatively high price, as the successful bidder is required to pay off the full tax debt. Properties that have lingered unsold for five years are finally put up at a scavenger sale, where the county virtually gives them away, generally for less than $500, and all back taxes are extinguished.

The problem of undesirable properties is most severe in west- and south-side neighborhoods--North Lawndale, Garfield Park, Englewood, Woodlawn--that were abandoned years ago by middle-class residents and businesses. Today, few private developers invest there; risks are too high, the profits too low.

The few who do invest in poor neighborhoods are by and large either speculators dreaming of a transformation like the one in Lincoln Park, where soaring rents and property prices drove out the poor, or slumlords. Both kinds of investor tend not to maintain their properties, and they don't give a damn about the people who live there. That's how the task force sees it, anyway.

"[Tax] delinquency reflects a larger problem," says Barbara Shaw, cocoordinator of the task force. "It reflects a pattern of disinvestment in poor communities. If I'm not going to put anything into my property, I'm surely not going to pay my property-tax bills."

"The way they make money is to milk a building," Lancelot adds. "They take the rent out and put nothing in."

That means owners don't pay any bills--water, utilities, or property taxes. In time the buildings fall apart, but the delinquent owners go unpunished.

"There are thousands of delinquent property owners out there, many of them using fictitious names," says Thomas McNulty, chairman of the task force and the former tax-division chief of the Cook County state's attorney's office. "I was with the county for three and a half years. We had 12 lawyers chasing these guys. We filed thousands of lawsuits. We collected $60 million. And that wasn't even a dent."

Part of the problem in collecting taxes is that when a building is sold at the scavenger auction, the sale can take as long as two years to be made official. Meanwhile the building is in a kind of tax limbo.

"When you offer the highest bid at a scavenger-sale auction, you do not legally own the property yet," says Shaw. "You have a certificate of purchase, but you don't have the tax deed. That certificate of purchase entitles you to petition the court for the official tax deed. You have to go through a statutory legal process, notifying all interested parties before the deed is yours."

In addition, there is a redemption period in which the tax-delinquent owners can pay up and get their property back. Owners of a residential property with less than seven units have two years after the scavenger sale to redeem their property by paying the back taxes. Owners of larger residential properties (and commercial and industrial properties) have a six-month redemption period.

"The tax statutes are oriented toward delinquent owners," says Shaw. "There is a great emphasis on retention of property, and not as much on enforcement."

The statutes also leave a lot of room for maneuvering. Savvy operators have devised all sorts of schemes to avoid paying taxes.

Shaw calls the scavenger sale "an auction of last resort," and adds, "The county is not so much interested in collecting back taxes as putting the property into responsible taxpaying hands. So according to current law, the moment that sale is confirmed, that tax lien is extinguished. It can be $150,000, and it's still extinguished.

"OK, so what happens is, if I'm the delinquent owner, I get my buddy Joe to bid for me. He gets title to the building, and my bill is cleared."

Sometimes a stranger could unwittingly help a tax-delinquent property owner escape the tax man. Shaw explains, "The delinquent owner will approach the new owner after the auction and say: 'Listen, you don't need these headaches. You bid $5,000 for that building. I'll give you $7,000 for your troubles.' Chances are the new owner will go along. He's making $2,000, and the old owner has his tax debt cleared for cheap."

Then there's the scam known as the "paper chase," which can extend the redemption period indefinitely.

"The paper chase begins when the delinquent property owner conveys 5 percent of his property to someone else--a friend or a business partner," says McNulty. "That means the new owner, who buys the building at the auction, has to serve this 5 percent partner with papers notifying him of the sale. And that's where the paper chase begins. Do you know how hard it is to get ahold of these guys? You can convey property interest to anyone you want to. Some of the names are made up. We had one guy who conveyed 5 percent ownership to Sammy Davis Jr. Eventually the county will discover the fraud, but it takes time and judicial proceedings to have the conveyance ruled a sham. Meanwhile, you're running all around town, spending money on lawyers.

"After a while, you're at the mercy of the original tax-delinquent owner. He can leverage you. He can say: 'Look, give me some money and I'll go away with the 5 percent partner.' Or he can say: 'Maybe I'm not the property owner anymore, but neither are you. You screwed me, so I screwed you.'"

The task force hopes to eliminate such scams. They'd like to make it illegal for cohorts of the delinquent property owners to bid on the property. And they'd like the tax bill to be extinguished not at the point of auction but when the tax deed is issued. Also, starting in 1990 delinquent properties will be sold at scavenger sales after two years instead of five. That's fine, but as the law stands now, all properties would then have a two-year redemption period. The task force would like to amend the law, through a statewide referendum, so that larger buildings would have a six-month redemption period.

"I guess as long as there are people with imaginations, there are going to be new schemes attempted," says McNulty. "But we think our proposals will provide the county with effective methods to eliminate the abuses."

Of course, not all delinquent property owners are unscrupulous manipulators of the law, Many are just regular folks who, for one or another reason, fell behind on their bills.

"I understand what the reformers want to do, but I have some trepidations about it," says Vernon Ford Jr., a west-side lawyer and developer. "We have to look at the impact of these changes on the community. Are these new laws going to make it easier for the county to take property out of the hands of ordinary black folks? That's a potential problem."

Ford points out that the cost of maintaining a building usually far exceeds the rents that poor tenants can afford. Thus, without a subsidy, many property owners in poor neighborhoods cannot make ends meet. This is a problem the task force does not address.

"We have what I call a 'false market' that allows ghetto properties to exist," says Ford. "Take a look at all the successful [ghetto] buildings. They receive some kind of government subsidy, otherwise the owners wouldn't be able to pay their bills. But the ordinary property owner, he doesn't have access to those subsidies, It's only the not-for-profit community groups and big developers who get them.

"The ordinary guy, he maybe inherits a building from his parents. Now what's he going to do? You look at the economy of running a 20-flat by an indigenous person--the economics are not there. You've got people paying $200 a month in rent, and heat [alone] costs that much in the winter.

"These are the kind of landlords who are falling behind on their property taxes. We're not talking about the pros--you know, the notorious slumlords who know how to recycle buildings. We're talking about ordinary black folks. These are the people the new laws are going to punish."

Neither side knows for sure what percentage of tax-delinquent buildings is owned by slumlords and what percentage by ma-and-pa operators. But Ford's point of view is apparently shared by other west- and south-side residents. In last November's election, strong opposition from black voters helped defeat the referendum backed by the task force to trim the redemption period on larger properties auctioned at a scavenger sale.

"I think there's a perception that they're trying to take property out of black hands," says Ford. "The reformers have to deal with that."

The task-force members have attempted to assuage these fears by lobbying black legislators and by trying to win the support of community groups in black areas.

"I've heard about those perceptions; they were a constant undercurrent during the referendum campaign," says Scott Lancelot. "They may have had something to do with the referendum losing, although there were other factors, like poor ballot position. All we can say to that is that this is a color-blind system. The overwhelming intent of this legislation is to put the property into the hands of people who can fix it up. If taxes aren't being paid, you lose the property, no matter what your race is." One thing the task force envisions is community groups buying and managing tax-delinquent properties.

"There may be some ma-and-pa property owners out there who fall behind on their taxes," says Lancelot. "But when you come to those big 40-unit buildings, you're talking about sophisticated investor owners. Besides, buildings offered at the scavenger sale are five years delinquent. That's a long time for someone to say, 'I've run into hard times.' Landlords at scavenger sales have had long notice to pay their taxes. They've had ample time to search for other financing. If they can't handle the finances, maybe it's time they gave up their building."

Art accompanying story in printed newspaper (not available in this archive): photo/Jon Randolph.

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